Common deficiences in peer review

Preparing for your peer review? The following are common deficiencies noted by peer reviewers. Firms should review this list early as they plan for their peer reviews.

Significant engagement deficiencies

Significant deficiencies include matters that are normally material to understanding the report or financial statements or represent a critical auditing or SSARS procedure. Due to their significance, these deficiencies could result in a qualified peer review report. While this list is not all-inclusive, it does contain the most common, recurring deficiencies.

Reports:

Failure to appropriately qualify an auditor's report for a scope limitation or departure from the basis of accounting used for the financial statements.
Departures from standard wording where the report does not contain the critical elements of applicable standards.
Issuance of an audit or review report when the accountant is not independent.
Failure to issue reports on compliance or internal control for audits subject to Government Auditing Standards.
Failure to disclose lack of independence in a compilation report.
Failure to disclose the omission of substantially all disclosures (in a compilation with disclosures).
Failure to disclose the omission of the statement of cash flows in financial statements prepared in accordance with GAAP.
Failure to disclose an "other comprehensive basis of accounting" (OCBOA) for financial statements compiled without disclosure, where the basis of accounting is not readily determinable from reading report.
Failure to disclose, in the accountant's or auditor's report, a material departure from professional standards, such as:

non-consideration of appropriate subsidiaries with a parent company's financial statements;
omission of significant income tax provision on interim financial statements;
omission of significant disclosures related to material defined employee benefit plans;
\non-recognition of significant deferred income taxes;
omission of required supplemental information for a common interest realty association.

Financial statement measurement, presentation and disclosure:

Inclusion of material balances that are not appropriate for the basis of accounting used.
Failure to include a material amount or balance necessary for the basis of accounting used, such as:

examples include omission of material accruals;
failure to amortize a significant intangible asset;
failure to provide for material losses or doubtful accounts;
failure to provide for material deferred income taxes).

Significant departure from the financial statement formats prescribed by industry accounting and audit guides.
Omission of significant required disclosures related to material financial statement balances or transactions.
Omission of disclosure of significant accounting policies applies (GAAP or OCBOA).
Omission of significant matters related to the understanding of the financial statements (the cumulative material effect of a number of disclosure deficiencies).
Improper accounting of a material transaction (for example, recording a capital lease as an operating lease).
Misclassification of a material transaction or balance.
Failure to include a summary of significant assumptions in a financial forecast or projection.
Use of a statement of changes in financial position where a statement of cash flows is appropriate.
Failure to segregate the statement of cash flows into the components of operations, investing and financing.

Audit procedures and documentation:

Lack of using a written audit program.
Failure to request a legal representation letter, if an attorney was consulted.
Failure to obtain a client management representation letter.
Failure to document the auditor's consideration of the internal control structure.
Substantial inadequate documentation of key audit areas.
Failure to document tests of compliance for engagements subject to Government Auditing Standards.
Failure to perform adequate tests in key audit areas.
Failure to observe inventory when the amount is material to the balance sheet.
Failure to perform essential audit procedures required by an industry audit guide.

SSARS procedures and documentation:

Failure to perform analytical and inquiry procedures for review engagements.
Failure to document analytical and inquiry procedures in a review engagement.
Failure to "read" compiled financial statements for obvious or material errors.
Failure to obtain a client management representation letter for a review engagement.

Minor engagement deficiencies

Minor deficiencies include departures from professional standards that are not normally material to a proper understanding of the report or financial statements or to the performance of an audit or accounting engagement. As a result, these departures, by themselves, would not usually cause a qualified report. While this list is not all-inclusive, it does contain the most common, recurring deficiencies.

Reports:

Failure to report on supplemental information (a reasonable reader of the report will likely presume the same level of reporting responsibility as that of the basic financial statements).
Minor departure from standard report language, provided the report is not otherwise misleading about the degree of responsibility taken.
Failure to reference all time periods encompassed by the financial statements.
Inclusion of a reference that the omission of the statement of cash flows for financial statements prepared on an OCBOA (a statement of cash flows is not required for financial statements prepared under an OCBOA).
Minor report dating departure.
Failure to disclose an OCBOA for financial statements compiled without disclosure where the basis of accounting is readily determinable from reading the report.
Omission of reference to statement of changes in equity (when otherwise included in the financial statements).

Financial statement measurement, presentation and disclosure:

Omitted or inadequate disclosures related to minor account balances or transactions, such as minor disclosure deficiencies related to accounting policies, inventory, valuation allowances, long-term debt, related party transactions, concentrations of credit risk, deferred income taxes or employee benefit plans.
Minor departures from the financial statement formats recommended by industry accounting guides.
Failure to reference the financial statements to the accountant's report or the accompanying footnotes.
Use of financial statement titles that are not appropriate for the basis of accounting used when the accountant's report, financial statements or footnotes otherwise indicate the basis of accounting (for example, "balance sheet" that is associated with GAAP, may not be appropriate for cash basis financial statements).
Failure to include the title "Selected Information-Substantially All Disclosures Required by Generally Accepted Accounting Principles Are Omitted" as appropriate for the presentation of certain selected disclosures.
Failure to accrue income taxes where the accrual and provision are expected to be immaterial to the financial statements taken as a whole.
Presentation of treasury stock in financial statements of a Maryland corporation.

Audit procedures and documentation:

Failure to document assessment of control risk when the audit program and substantive procedures support assessment at the maximum for all critical assertions related to significant balances and classes of transactions.
Minor documentation deficiencies related to substantive tests.
Failure to evaluate "passed" adjustments, but cumulative effect is not likely to be material to the financial statements.
Failure to extrapolate results of sampling applications, but extrapolated results would not have a material effect on cumulative "passed" adjustments.
Outdated audit program, but no critical procedure stemming from recent standards was omitted.
Omitted minor audit procedures.
Minor dating discrepancies between attorney letters and end of fieldwork.

SSARS procedures and documentation:

Minor documentation deficiencies related to review engagements.
Minor omitted procedures related to review engagements.